Biovail pays US$10M to settle with SEC; Melnyk says he'll clear his name
TORONTO - Ottawa Senators owner Eugene Melnyk says he'll clear his name of allegations that he misled investors while he headed Biovail Corp. (TSX:BVF), a drugmaker he's battling in court and which agreed Monday to pay a US$10 million fine to settle a U.S. regulator's charges of civil accounting fraud and deceiving investors and analysts.
The Ontario Securities Commission and the U.S. Securities and Exchange Commission are alleging Biovail filed inaccurate financial statements and misled investors in recent years with the involvement of Melnyk and other executives.
Melnyk issued a statement saying he's working to resolve some of the reporting issues nearly five years ago but "categorically" denied the regulators' allegations that he misled Biovail investors and said he'd fight the "absolutely false allegations of the SEC and OSC."
He added that he ensured that the key facts as he understood them were disclosed promptly to the investing public.
"I intend to vigorously contest the absolutely false allegations of the SEC and OSC and am confident that I will prevail once all the facts are heard," Melnyk said.
The Toronto-area drug company said it would't comment beyond a news release issued Monday.
In it, Biovail said current chief financial officer Kenneth Howling, who was responsible for corporate communications at the time of the alleged events, and John Miszuk, its current controller and assistant corporate secretary, have been reassigned.
Also named in the allegations by both regulatory bodies is Brian Crombie, a former chief financial officer.
Although both securities regulators are dealing with largely the same events and accusations, the SEC uses tougher wording in its allegations against Melnyk and the other individuals.
Biovail and senior executives "engaged in a pattern of systemic, chronic fraud" that distorted its quarterly and annual reports filed over four years, Mark Schonfeld, director of the SEC's New York regional office, said in a statement.
To conceal the fraud, the executives "intentionally misled the company's auditors and the investing public, showing their complete disregard for their responsibilities to shareholders," Schonfeld said.
In October 2003, the SEC alleged, Biovail and several executives deceived investors and analysts by falsely attributing nearly half of the company's failure to meet its third-quarter earnings target to a truck accident involving a shipment of Biovail's antidepressant Wellbutrin XL. The accident in fact had no effect on earnings for the quarter, the SEC said.
The agency also accused the company of three fraudulent accounting schemes between 2001 and 2003: Shifting around US$47 million in expenses for drug research and development onto the books of a "special purpose entity," concocting a phony transaction to record $8 million in revenue, and intentionally misstating losses from foreign currency transactions to understate a quarterly loss by some $3.9 million.
The American agency's 55-page statement of allegations also includes issues involving Melnyk's family trust that were settled by him and the Ontario regulators last year.
In June, Melnyk agreed to pay $1-million to settle with the Ontario Securities Commission and was barred from being an officer or director of Biovail for a year but he flatly denied any wrongdoing and said he simply wanted to put the matter behind him.
Most of the allegations released Monday by the OSC enforcement branch are against Biovail and individuals other than Melnyk, although it also targets him, Crombie and Howling for comments they made in an October 2003.
The OSC also alleges the company made misleading or untrue statements in news releases, investor meetings and an analyst conference call concerning the reasons its earnings fell short of expectations in October 2003.
That happened after a load of Wellbutrin XL being driven from Biovail's factory in Manitoba was written off after a traffic accident in the Chicago area involving a delivery truck carrying the pills.
The OSC and SEC also allege Biovail failed to account properly in its 2001 and 2002 financial statements for a special purpose entity called Pharmaceutical Technologies Corp.
The allegations made public Monday also say there was improper recognition of revenue from a mid-2003 transaction involving Wellbutrin XL, an antidepressant which became the company's biggest money-maker.
Melnyk, who founded Biovail in the early 1990s and later used his personal fortune to buy the Senators, was chairman and chief executive of the drug company at the time of the alleged infractions.
"I am disappointed by the proceedings commenced today by the U.S. Securities and Exchange Commission and Ontario Securities Commission," Melnyk said in a statement.
"The vast majority of the allegations made by the SEC and OSC do not pertain to me. The only allegations made against me by the SEC pertain to a single missed shipment of Wellbutrin that occurred almost five years ago, in 2003, as well as to certain unrelated reporting issues that have already been resolved with the OSC and have been addressed in a regulatory filing with the SEC earlier this year."
Melnyk said he intended to resolve the reporting issue "while denying and rejecting categorically the unfounded claims of the SEC and OSC that I misled Biovail investors in 2003 concerning this one-time and single shipment of Wellbutrin."
Melnyk has become increasingly at odds with Biovail's current management and board of directors and is pressing to replace CEO Douglas Squires and current management.
According to a notice filed with Ontario Superior Court on Thursday, Melnyk alleges that Squires made comments contrary to the Canada Business Corporations Act on March 13 while he spoke to reporters and analysts after the company reported a big quarterly loss. The company denies his allegations.
Biovail's shares fell to a new multi-year low on Monday but later rebounded. The stock hit an intraday low of C$10.30 - well below the previous 52-week low of $11.50 on the Toronto Stock Exchange - before recovering later in the session.
At the end of the day, Biovail shares closed at C$12.04, up 26 cents from the previous close but down from the 52-week high of C$28.78 and down from $50.25 at the end of September 2003.
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